The Post-Autistic Economics Movement

Greg Mankiw is the author of the most popular introductory Economics textbook on the planet. As such he is also the target of criticism from the left, the right and from the post-autistic economics (PAE) movement. I don't know much about "post-autistic economics" other than the fact that they are purportedly challenging the "mainstream"/"neo-classical" economics of which Mr. Mankiw is an easy target. I don't know that I agree with their use of the medical term "autism", by which they mean "closed-minded" or "self-absorbed" but I do think that some of the complaints raised by the co-founder of the movement are worthy of some careful thought. Anytime there is a legitimate concern that ideology is trumping true scientific inquiry I think it is only responsible to take a look a little bit deeper:

While Mankiw’s text is easy for professors to use, it oversimplifies economic theory and leaves out the ways in which markets can degrade human well-being, undermine societies, and threaten the planet. Each year, tens of thousands of students go out into the world, with Mankiw’s biases as a roadmap to the future. But we know that the neoliberal agenda is more and more disputed outside universities. And within universities, alternative textbooks are flourishing. One can thus hope that these new textbooks, with their greater relevance to real world problems – and their better acknowledgment of the diversity and complexity of economic thought – will soon out-compete Mankiw’s bible. As a believer in competition, Professor Mankiw could only consider this to be fair game.

This is the warning sign the PAE team proposes economics teachers should place on their textbooks.


It's a good thing we live in an imaginary world with endless quantities of oil and other natural resources otherwise I would have to go back to college and learn "real" economics!

Great Interactive Oil Chart

For those looking to understand the flows of oil around the world, this chart is perhaps the best attempt I have seen to date at simplifying it.

Enjoy!

Peter Thiel: "There is Absolutely No Bubble in Technology"

Peter Thiel is one of the great stories of the last decade. He has an undergraduate degree in Philosophy and a law degree from Stanford and was running a small hedge fund when he bumped into tech whiz kid Max Levchin (now with Slide). Together Max and Peter co-founded PayPal, eventually taking the company to IPO and then sale to EBay. Now Peter runs a successful macro hedge fund - Clarium Capital Management - with over $2 billion in AUM. He also started the Founders Fund, a founder-friendly venture capital fund with significant investments in Facebook, Slide, Jaxtr etc.

The clip below is from Kara Swisher's interview with Peter earlier this month. In it Peter discusses the major trends in the media, how old media companies can and should adapt, how Web 2.0 companies can monetize their users, and perhaps most importantly whether Web 2.0 companies are overhyped. The answer (from a guy who is an early Facebook investor) is absolutely not. His argument on Facebook is the following: if the growth (of users I assume) continues for 2 years Facebook will be worth a factor of 10. If the revenue model works thats a nother factor of 10. Using simple math, if the company is successful on both fronts the company is worth a factor of 100. I'm not too worried about number 1. Facebook has been dead on in its user interface and ability to get users to consistently visit the site. But the monetization question is a big question, and without it Facebook may not even be worth $15 billion.

I do however like Peter's analysis of bubbles:

"I was here in 1999-2000 and it is not like this, even remotely . . . The other point is the history has just been . . we had a boom and a bust, and people remember the bust better than the boom. People are stilling dominated by fear not by greed, we are barely getting out of that. I don't think things are over-hyped. I don't think Facebook is over-hyped. I think almost none of these companies are. Some will turn out to be very valuable, some will turn out to be a lot less valuable. In aggregate I don't think there is a bubble at all. There is a bubble in housing, their is a bubble in China, there is probably a bubble in Private Equity funds and the finance industry but there is absolutely no bubble in technology."

(I apologize, the video is a little bit larger than the space I have here!)

The Case Against Decoupling, Part II

This is from the WSJ this morning. Those of you who have been generating strong returns by orienting your portfolio towards international and emerging markets should take a second to digest the effect a recoupling would have on your portfolios:

With worries over the fallout from the housing and credit markets deepening, the once-widespread view that Europe and Asia would pick up the slack and shield the global economy from the effects of a U.S. downturn is being put to the test.

Investors embraced the idea, shuttling money abroad and buying shares of companies with big overseas operations, like Wm. Wrigley Jr. Co. and 3M Co. -- until disappointing results from both sent their shares down. Technology companies, which as a group have the largest overseas-sales exposure, were another popular destination. After weathering the initial stages of the stock-market selloff in October, they have fallen sharply this month.

Less than two months ago, the International Monetary Fund offered a remarkably upbeat view that global economic growth would slow down just a smidge to 4.8% next year from an estimated 5.2% this year. But that no longer seems certain.

"It's quite clear that the downside risks to world growth have increased since we met about a month ago at the IMF," the governor of the Canadian central bank, David Dodge, said recently.

House prices have continued to fall in the U.S. and elsewhere, banks in the U.S. and Europe have announced billions of dollars in mortgage-related losses, stocks around the world have fallen sharply and an unrelenting reluctance by banks to lend -- even to one another -- has prompted the Federal Reserve and European Central Bank to act.

The notion that the rest of the world has "decoupled" from the U.S. came into vogue earlier this year, as overseas economies -- particularly emerging markets -- continued to post robust growth and Europe and Japan appeared to be enjoying a long-delayed upturn.

Policy makers joined the decoupling parade. In the spring, the IMF included a chapter in its April World Economic Outlook called "Decoupling the Train." The gist: The current weakness of the U.S. economy stems largely from housing woes -- and housing is less global than, say, computers and other parts of the U.S. economy. That is good news for the rest of the world.

But the U.S. is now flirting with something more severe than a mere slowdown. That -- along with rising oil prices and the specter of a global credit crunch -- is changing the picture.

The WSJ isn't the only one pointing out the risks of a recoupling. Toro has similar concerns and is considering adding Emerging Markets to his list of shorts:

I think the top is in and it is time to start shorting the emerging markets.

The central premise is that the world cannot and will not decouple from the United States. If the American economy is slowing or going to go into a recession, the reverberations will be felt around the world.

Not only is America slowing, Japan is as well. And Europe may be also slowing. I believe both Japan and Europe will follow the United States.

US equity markets are discounting a recession. The stock market is a notoriously poor predictor of recessions, however, and frankly, I have no idea if we are going into a recession or not. But I do know that risk is rising in the financial system, and even if we escape a recession, the secondary and tertiary after-shocks in American asset markets which are occurring now will be felt around the world. The idea that the emerging markets can escape the spreading contagion is nonsense, in my opinion.

As risk premiums rise, investors will pull back around the world, and will especially do so from emerging markets as emerging markets are the highest beta markets. Currently, spreads on emerging market bonds are 270 bps, up less than 100 bps off their lows several months ago. In 2002, spreads were 1000 bps. We may not hit a 10% premium over Treasuries again, but I am very, very confident that the peak of this cycle is not 2.7%.

There are also concerns about Cisco's slowing revenue growth in the emerging markets:

Morgan Stanley noted yesterday morning that in Cisco's F1Q08 quarterly filing, data for the emerging markets showed a significant deceleration in revenue growth. Specifically, emerging markets revenues grew 19% YoY in the October quarter, down from 35% YoY growth in the August quarter and 36% YoY growth in the same quarter a year ago. The firm said that while they remain confident in their Overweight-V rating and $38 price target, they would closely monitor this critical part of Cisco's growth story for signs of a rebound or further deterioration.

Hat Tip: WSJ, Toro, Seeking Alpha

Pandora is Cool

I've recently become addicted to internet radio site Pandora. If you haven't already checked it out you should go there now. It's a great way to find new music. My only warning is that it is a bit addicting. As usual all things in moderation.

Recessions, Corrections and Bears (Oh My)

1. The probability of a US recession in 2008 continues to rise with Intrade putting the probability at 47%. Goldman puts those odds at between 40-45%.Meanwhile Former Secretary of the Treasury (and former Harvard President) Larry Summers thinks a recession is 'likely':
2. But, usually we don't know about a recession until after it is over:
3. The US market entered correction territory (10% downturn) for the first time since11/02-3/03:
4. The Shanghai stock market officially entered a bear market (20% downturn):
   

In such a market environment, having lower volatility assets in your portfolio is incredibly valuable. We continue to be optimistic about the growth story of some of our key stocks and about the fundamental value of an Endowment style asset allocation model.

Hat Tips: Bespoke, Ticker Sense

What to Make of Sovereign Wealth Funds

With sovereign funds becoming more and more active players in global financial markets we could see a variety of interesting "side effects":

1. Rising Protectionist Sentiment (especially for strategic assets).
   
2. A "sovereign wealth" premium: companies viewed as "strategic assets" will increasingly become targets of foreign governments, increasing their market value.
3. The line between between national and economic interests will be blurred even further, sparking many vigorous debates in economic journals and on the RGE Monitor.
   
4. Renewed vigor for running balanced budgets in the US (unlikely).
5. Renewed concerns about our addiction to oil. After all it is estimated that as long as oil is above $70/barrel, over $2 bln worth of petrodollars flows into financial markets every day.
   
6. Hank Paulson being reduced to tears as another foreign government rebuffs his pleadings to appreciate their currency.
7. Increased calls for transparency about the operation and holdings of SWF's. All of which will be rebuffed.
8. Much confusion about why we call these funds "Sovereign Wealth Funds."
9. Concerns that China plans to infiltrate the US using Stephen Schwarzman's "Skull and Bones" connections. Did you know that Schwarzman and George Bush were college roommates?
   
10. SWF's will become a huge issue in the presidential election after China, Singapore, Kuwait, or Abu Dhabi buys a US airline company, port or bank (oh wait . . . ).
    
11. Much overblown populist rhetoric that overextrapolates the growth of SWF's and is used to scare the American people into raising tariffs and enriching more American farmers.
12. Economists finally being able to explain the true cost of "mortgaging our future" to finance frivolous spending and frivolous wars. Yes, when you run deficits you are basically giving away a part of your country . . . its just that until now country's didn't take advantage of their power over us.
    
13. Very little rational, and realistic dialogue about what is likely to happen as we watch SWF's become the trendy thing to do with forex reserves (Thanks John):

The US has accumulated hundreds of billions of dollars in trade deficits in the past few years. Some of the deficit may be due to undervalued currencies, particularly the Chinese renminbi, but most of it would probably have occurred even if the renminbi was much stronger during this period. The truth is that the US has shifted a vast amount of its production abroad and must deal now with the resulting accumulation of external imbalances that are now being placed in sovereign wealth funds.

Clearly, the US can no longer be too picky on what kind of capital it will accept. For many decades, the US assumed that Asian countries would accumulate forex reserves and purchase Treasuries, as the ramifications of currency appreciation were as bad for them as a rout in the USD/Treasury market was for the US. The Bush administration even condoned Japan’s massive yen interventions in 2003-2004. But now that Asian SWFs are being created, they undoubtedly will be investing in equities soon; it is just a question of the timing and the method.

Many voices in the US government now say that this accumulation of reserves is illegitimate as it was caused by currency intervention, and that Asian governments should not be allowed to buy large portions of the US. While there are justifiable concerns about a communist country such as China owning controlling stakes in many “national interest” industries in the US, the general fear of Asian equity ownership is unfair and impractical. The US allowed this unbalanced system to develop and the natural consequence is for Asians, whether citizens or their governments, to own large portions of US assets, and not just Treasuries. With appreciating currencies, the Asian SWFs must seek higher risk assets such as high-yield bonds, equities and real estate in order to achieve acceptable returns.

The safest way to avoid an asset/trade war is to allow SWFs to invest passively in equities via indexed products or via external, long-only, diversified investment managers. Both sides should agree on a simple reporting system regarding such purchases, with restrictions that would be triggered if the overall SWF ownership level rises above 30 per cent.

If this is not achieved, Asian SWFs may rapidly diversify away from the dollar, with the euro bearing the greatest brunt of appreciation, and also likely causing a sharp rise in commodity prices. Trade protectionism and acrimony would certainly follow. While this has not yet occurred, China’s recent creation of its massive SWF and its growing influence in the world changes the rules. This trend will gain momentum very quickly, so it would be best to seek agreements on the above items as core principles of “SWF best practices” rather than wait for a long negotiation over a complete set of such principles.

If you have any thing to add to this list I encourage you to post.

A New Mortgage Reset Graph

I'm a big fan of mortgage reset graphs. They are a great way to end a discussion about the near future of housing prices because they are just so difficult to argue with. At any rate, here's the latest from the WSJ and Bank of America. I have also attached the other mortgage reset graphs from previous months:


This is from Credit Suisse. Please note that the red arrow denoting "You are Here" is now 3 months out of date. In December we will be at the peak of the first mountain:


And this is from the IMF:
I think this last graph really validates my prediction of a 2012 stabilization in home prices.

Happy Thanksgiving!!